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  • Writer's pictureMilo F. Hanke, CFP

Name Dropping, Market Noise & Candy Corn Third Quarter 2021 Newsletter

Once reporters can quote a Harvard professor, it seems they score immediate legitimacy for their own agenda, often producing “noise.”  I know.  Soon after college, I became a news officer for "a certain school in New England." 

To raise the profile of Harvard University faculty and its research communities, I pitched stories to national news outlets.  Not every item was as serious as lifesaving DNA discoveries.  On occasion, my press agentry touted “Harvard studies” that were hardly Nobel-worthy, but fun stuff to float on a slow news day.   

Surprisingly, the most widely circulated story had been a talk at Harvard about drunkenness in Russia.  A professor from Henry Kissinger’s former department presented quotable, breezy observations of his encounters with Russian nightlife - an erudite drunk-a-log/travel log topped off with grim statistics and historical anecdotes.   The Cold War was still on, so this story was catnip to editors delighting in the travails of godless communism. 

Decades later, I get daily doses of my own medicine from glory days in the news business.  Karma, maybe.  So, today as our firm monitors the financial press, we help clients filter out noise that poses as fundamental news - particularly updates from the Armageddon beat.

As Sure as Candy Corn

This week we heard from an always curious, sometimes apprehensive client whose emails make us think.  He seemed mildly spooked by a recent Harvard study that had been twisted and tortured on a junk news site.  The study itself analyzes centuries of economic history yet provides no guidance useful to ordinary investors.  By sleight of hand, however, the reporter grabbed eyeballs with a cheap lead paragraph: “October is the most volatile month for stocks – and when stocks suffered their two worst crashes in U.S. market history.”   

It’s perennial as candy corn at Halloween.  Every fall we receive questions about the potential of another October crash, at least a partial repeat of 1929 or 1987.  It reminds us of a classic fallacy that goes like this:

Hitler and Stalin were heads of state. Both wore mustaches. Both were murderous tyrants.  Ergo, heads of state who wear mustaches are murderous tyrants.

We can say with certainty (and tongue in cheek) the probability of a market crash occurring in October or in any other specific month is 8.33% (one divided by 12).    

We also deal with a quadrennial prediction - how will the market fare with a Republican or Democrat in the White House.  The comparative number is one that most San Franciscans like (now we’re pandering), but it’s dangerous to bank on.  The sampling data is inadequate.  As the brain is a pattern-seeking organ, we risk conferring predictive value to scant pieces of information, the October crash theory being one example.  

Our clients are not day traders or oddsmakers.   Yet our firm seeks to maintain a general understanding – a macro view - of economic developments affecting longer-term market direction.   At the individual level, each client has a long-term strategy.  It comes with a dashboard that remains attuned to their lives - their goals - and it cancels most noise. 

Eschew the “Counterfactual”

To caution news junkies and day traders, a Federal Reserve study dissected an Internet blooper to underscore “… there is no objective way for observers to separate fundamental news from noise components when markets react to a news report.”    The astonishing example cited:

“On September 8, 2008, a six-year-old article about the 2002 bankruptcy of United Airlines’ parent company resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy filing by the company. This episode caused the company’s stock price to drop by as much as 76% in just a few minutes.”  United shares took a week to recover from what in “Fed speak” was a “counterfactual stock price path.”  

“Gamification” of Investing

The swelling number of do-it-yourself investors brings with it more “noise traders” – individuals whose misinformed trades create short-term market distortions.  Many of those noise traders, typically novices, use a trading website that Massachusetts regulators cited for “its aggressive tactics to attract inexperienced investors” and “its use of gamification strategies to manipulate customers.”   One of the site’s users committed suicide in the mistaken belief he had lost $750,000.   

Who/What’s More Volatile – You or the Market?

We always discuss the appropriate degree of market volatility.  How about posing the question the other way around - what’s the degree of client volatility?   The relationship can get testy. After all, the market is an uncertain, idiosyncratic partner whom you rely upon to carry you to a certain destination.  In the background, you hear noise steadily spewing from certain corners of the financial press.  

For our clients, we ideally fashion an “all-weather,” long-term portfolio so they maintain their cash flow – and their cool - through major contractions along the way.   But with every financial plan, we focus on how the suggested investment strategy feels to the client.

Quickie Stress Test

Earlier, I mentioned a client who sought our response to a story pulled from the Internet.  To put that matter in a personal context, we asked this hypothetical question:  

Let’s say there is a 20% stock market drop that leaves bonds unchanged. Because your portfolio is presently comprised of 70% stocks and 30% bonds, the overall value would then dip by 14% (-20 x .7 = -14).   Would you be willing and able to wait for a market recovery?  On average, recoveries take 18 months, but what if it took five years?

We love what we do in part due to the dynamics of melding macroeconomics, risk management, personal finance, and some coaching.  Foremost, we do this within the financial planning process.  It’s all about the client sitting in front of us at this moment.  

Come rain or shine, noise or news, Hanke & Co. Wealth Management will be here.   We welcome your questions, comments, and concerns, including interesting reads from the Internet.

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